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Engineers  and  Architects  Association 

OF  SOUTHERN  CALIFORNIA 


Some  Features  of 

RATE  FIXING 

FOR  ELECTRIC  PUBLIC  SERVICE  PROPERTIES 


By  GEORGE  L,  HOXIE,  Ph.  D. 

Member  American  Society  Mechanical  Engineers 
Member  American  Institute  Electrical  Engineers 

of  Hoxie  &  Goodloe,  New  York  and  Los  Angeles 


Paper  presented  to  Engineers  and  Architects  Association 
of  Southern  California 


April  18,  1912 


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ENGINEERS  AND  ARCHITECTS 
ASSOCIATION 

OF  SOUTHERN  CALIFORNIA 


OFFICERS. 

Homer    Hamlin President 

Jas.   D.    Scliuyler 1st  Vice-President 

A.   B.   Benton 2nd  Vice-President 

H.    Z.    Osborne,    Jr Secretary-Treasurer 


DIRECTORS. 

John    C.    Austin 

N.    D.    Darlington 

R.  H.  Manaham 

E.   L.  Mayberry 


Some  Features  of  Rate  Fixing 

For  Electric  Public  Service  Properties 


By  GEORGE   L.   HOXIE,  Ph.   D.* 

Mem.  A.    S.   JM.   E.   and  A.  I.   E.   E. 

Rate-fixing  is  one  of  the  newer  engineering 
problems.  It  is  true  tliat  rate-fixing  com- 
missions have  been,  and  are,  largely 
composed  of  lawyers,  but  the  members  of 
all  of  these  commissions  h'ave  found  it 
necessary  to  rely  largely  upon  their  engin- 
eering experts,  and  it  seems  to  the  writer 
entirely  probable,  as  well  as  desirable,  that 
the  engineering  profession  should  in  the 
future  have  an  increasing  share  in  handling 
rate-fixing  matters.  It  seems  probable  that 
■  for  some  time  to  come  there  will  be  a  stead- 
ily increasing  number  of  engineers  either 
employed  directly  by  commissions,  or  em- 
ployed by  public  service  corporations  in 
connection  with  the  work  of  commissions. 
It  is  therefore  important  that  engineers 
should  devote  some  attention  to  the  prob- 
letns   of  rate-fixing. 

It  is  not  the  intention  of  the  present  paper 
to  present  solutions  of  any  of  the  various 
questions  that  are  continually  arising  in 
rate-fixing,  or  even  to  enumerate  all  of  the 
important  matters  connected  therewith,  but 
it  is  the  author's  aim  to  speak  of  some  prob- 
lems in  a  very  general  way,  in  the  hope  that 
there  may  be  a  full  discussion,  leading  also 
to  a  preparation  of  other  papers  by  other 
authors,  to  the  end  that  the  engineering 
profession  may  have  the  large  influence  that 
it  should  have,  upon  the  working  out  of  the 
principles  that  are  to  guide  future  rate-mak- 
ing commissions,  and  may  also  guide  the 
courts  that  will  pass  upon  their  determina- 
tion.    The  writer  is  not  one  of  those  who 


*Of  the  firm  of  Hoxie  &  Goodloe,  Engineers, 
of  N'^w  York  and  Los  Angeles.  A  paper  to  be 
read  at  the  April  meeting  of  the  Engineers  and 
Architects  Association  of  Southern  California 
on    April    18,    1912,    at    Hollenbeck    Cafe. 


believe  that  the  first  few  court  decisions, 
covering  a  new  field,  should  form  precedents 
binding  the  human  race  for  all  time.  With- 
out criticising  any  court  or  any  decision,  it 
seems  to  the  author  that  the  whole  subject 
of  the  relation  of  public  utility  corporations 
to  the  public  is  so  unsettled  that  progress 
will  be  made  by  each  contributor  stating 
freely  what  he  thinks  ought  to  be,  substan- 
tially without  regard  to  past  court  decisions, 
or  even  to  existing  laws.  The  present  paper 
will  be  wholly  confined  to  a  discussion  of 
rate-fixing  as  applied  to  electric  public  ser- 
vice properties. 

Methods  and  rules  for  the  appraisal  of 
property,  and  the  principles  governing  deci- 
sions on  the  revenue  property  is  entitled 
to  earn,  are  not  yet  generally  agreed  upon. 
The  questions  involved  are  quite  new,  both 
to  engineers  and  to  lawyers,  and  perhaps 
it  may  be  said  without  disrespect  that  they 
are  also  new  to  judges.  It  therefore  hap- 
pens that  there  have  already  been  conflict- 
ing court  decisions,  and  probably  there  will 
be  in  the  future  a  good  many  more  such  deci- 
sions and  perhaps  greater  conflicts  than 
have  yet  become  apparent.  Eventually  of 
course  there  mtist  come  a  general  agreement 
on  questions  that  are  now  exceedingly  con- 
troversial. Such  agreement  can  come  only 
after  all  of  the  matters  about  which  there 
are  now  differences  of  opinion  have  been 
discussed  so  fully  that  the  fallacies  of  the 
wrong  notions  and  the  correctness  of  the 
right  notions  (whatever  they  may  be)  be- 
come at  last  apparent  to  all.  The  judges 
who  now  decide  things  are  perhaps  in  the 
most  difl[icult  position  of  any  of  the  parties 
involved.  A  judge  must  decide  on  what  is 
brought  before  him  and  has  little  or  no  time 
for  digging  out  ideas  of  his  own,  or  for  the 


or: 


bringing  out  of  points  perhaps  not  in  tlie 
minds  of  the  counsel  on  either  side.  Coun- 
sel also  are  largely  dependent  ui)on  their 
engineers.  Engineers  therefore  should  not 
permit  their  ideas  to  be  too  much  circum- 
scribed by  early  judgments  but  should  bear 
their  part  in  the  making  of  that  public  opin- 
ion which  when  fully  matured  will  event- 
ually be  expressed  by  law-makers  and  courts. 
There  has  already  been  a  considerable 
amount  of  published  discussion  of  various 
features  of  rate-making,  such  as  the  proper 
allowances  lo  be  made  for  depreciation; 
the  correct  methods  of  making  appraisals 
of  physical  property;  what  constitutes  a 
company's  investment;  going  value,  etc.  No 
particular  originality  is  claimed  for  any  of 
the  things  herewith  presented. 
Principles 

Rate-fixing  is  designed  to  accomplish  three 
objects.  First,  that  the  people  served  by  a 
public  utility  shall  pay  the  lowest  rate  pos- 
sible, consistent  with  efficient  service  and 
a  proper  return  on  the  investment  of  the 
corporation.  Second,  that  each  class  of  con- 
sumers pay  its  proper  proportion  of  the 
total  revenues.  Third,  that  there  shall  be 
no  discrimination  between  individual  con- 
sumers of  any  given  class. 

The  third  problem  is  not  difficult.  It  is 
only  necessary  to  pass  laws  forbidding  dis- 
crimination and  to  see  that  those  laws  are 
not  evaded.  There  is  no  difference  of  opin- 
ion as  to  the  desirabrlity  of  preventing  dis- 
crimination, and  there  is  little  difference  of 
opinion  as  to  what  constitutes  discrimina- 
tion. 

The  other  two  problems  are  very  difficult. 
Taking  up  the  first  question,  it  must  be  de- 
termined primarily  what  is  a  "proper  re- 
turn," and  second,  what  constitutes  "invest- 
ment." We  will  consider  to  begin  with  the 
case  of  a  successful  public  utility.  (It  is 
obvious  that  a  utility  that  was  not  needed 
by  the  people  served,  or  one  that  is  operated 
at  such  cost  that  the  people  served  cannot 
afford  to  pay  a  proper  return  on  the  cost, 
cannot  be  subjected  to  the  same  rules  that 
apply  to  a  successful  public  utility.)  The 
consumers  served  by  a  successful  corpora- 
tion can  afford  to  pay,  and  should  pay,  an- 
nually a  sum  of  money  sufficient  to  cover: 

(a)  The  usual  rate  of  interest  on  safe 
investments. 

(b)  An  additional  sum  to  compensate  for 
whatever  special  risk  the  business  of 
the  public  utility  may  involve;  and 

(c)  Such  excess  profits  as  are  necessary 
to  induce  capital  to  engage  in  the  bus- 
iness. 

Item  (a),  or  the  rate  of  interest  on  safe 
investments,  is  to  be  such  a  rate  as  may 
be  paid  by  savings  banks  or  yielded  by  high- 
grade  bonds,  that  is,  a  rate  that  would  be 
paid  on  money  invested  with  practical  safety 


and  where  the  capitalist  is  not  calKd  ujion 
to  exercise  much  personal  supervision  over 
his  investment  after  having  once  made  it. 

Item  (b)  will  vary  with  the  character  of 
the  business,  the  character  of  the  commun- 
ity served,  the  length  of  time  the  utility 
hag  been  established,  the  probability  of 
future  competition,  etc.  Item  (b)  may  be 
as  little  as  one  per  cent  or  it  may  be  very 
much  more.  For  a  settled  utility,  necessary 
to  the  community  served,  well  and  econom- 
ically managed,  and  not  unpopular  with  the 
general  public,  the  special  risks  inherent 
in  the  business  are  small,  and  are  such  as 
would  be  included  in  the  possibility  of 
strikes,  either  of  workmen  or  of  politicians, 
the  possibilities  of  new  inventions  making 
parts  of  the  plant  obsolete,  or  change  in  the 
attitude  of  the  public  leading  to  hardship, 
or  possible  bad  management  or  dishonesty 
in  the  future,  etc.  It  is  hard  to  imagine 
a  public  utility  that  must  not  face  these  and 
similar  possibilities  and  therefore  insurance 
should  be  provided  against  such  possibili- 
ties, such  insurance  to  take  the  form  of  a 
greater  return  than  a  savings  bank  or  high- 
grade  bond  would  make.  The  amount  al- 
lowed must  depend  upon  the  judgment  of 
the  rate-fixing  body  but  must  also  be  in  line 
with  integrated  judgment  of  investors,  ex- 
pressed by  the  prices  of  stocks  in  similar 
pubjic  utilities  as  compared  with  the  dif- 
ferent rates  of  return  on  such  stocks.  It 
should  be  pointed  out  that  the  stability 
given  by  proper  public  supervision,  which 
rate-fixing  implies,  (such  supervision  for  ex- 
ample as  the  state  of  Wisconsin  and  some 
other  states  now  give  to  their  public  utili- 
ties) should,  and  in  fact  does,  greatly  dim- 
inish the  risks  of  the  business  and  therefore 
diminishes  the  rate  that  investors  are  will- 
ing to  accept  on  stocks,  or,  otherwise  ex- 
pressed, operates  to  make  public  service 
securities  more  marketable. 

Item  (c),  covering  excess  profits  neces- 
sary to  induce  capital  to  engage  in  the  busi- 
ness, is  somewhat  akin  to  item  (b)  and  in 
fact  the  two  items  might  be  combined,  yet 
there  are  some  real  differences  and  it  has 
therefore  been  thought  proper  to  include  the 
third  item,  covering  inducement.  Capital  is 
usually  induced  to  engage  in  a  business  by 
a  promoter.  Item  (c)  may  therefore  be 
thought  of  as  represented  in  part  by  pro- 
motion stock,  or  by  the  earnings  of  promo- 
tion stock.  Usually,  however,  at  least  in  the 
case  of  those  few  public  service  enterprises 
that  are  initially  of  considerable  size,  the 
inducement  of  the  promoter's  eloquence  is 
not  suflScient.  The  capitalist  will  not  enter 
such  an  enterprise  unless  there  is  a  real 
money  inducement  (or  a  reasonable  expec- 
tation of  such  inducement)  in  excess  of 
ordinary  interest  plus  proper  payment  for 
risk.  It  must  be  remembered  that  the 
actual  risk  run  by  the  capitalist,  as   meas- 


ured  up  by  a  cold-blooded  commission  after 
the  enterprise  has  been  successfully  estab- 
lished, and  the  apparent  risk,  as  it  first  ap- 
pears to  the  timid  capitalist  at  a  time  when 
the  whole  project  exists  only  in  the  brain 
of  the  promoter,  are  two  very  different 
things.  If  then  the  enterprise  be  one  that 
the  public  needs,  the  public  must  be  pre- 
pared to  pay  an  inducement.  This  induce- 
ment may  be  in  the  form  of  a  moderate 
return  on  stock  partly  water,  or  larger  re- 
turn on  net  investment,  but  it  must  appear 
to  the  capitalist  to  be  reasonably  certain  or 
he  will  not  engage  in  the  business.  The 
size  of  the  necessary  inducement  must  be 
a  matter  for  the  judgment  of  the  commis- 
sion. Public  policy  demands  that  it  be  as 
small  as  possible,  but  public  policy  also 
demands  that  full  faith  be  kept  with  the 
capitalist  in  the  matter  of  payment  after 
he  is  fully  committed  and  is  helpless.  The 
present  tendency  in  some  states  is  to  cut 
down  "inducement"  to  the  point  where  many 
desirable  enterprises  cannot  be  financed. 
If  similar  rules  applied  all  over  the  world, 
capital  would  be  forced  to  accept  them.  As 
it  is  capital  is  very  nimble,  and  goes  where 
it  can  do  best  for  itself.  It  follows  that 
stagnation  sometimes  comes  to  a  commun- 
ity as  a  result  of  actions  taken  with  the 
best  possible  motives,  and  perhaps  perfectly 
desirable  and  politic  actions,  could  they  only 
apply  the  world  over. 

The  promoter  as  well  as  the  capitalist 
must  usually  be  paid.  Where  the  enterprise 
grows  from  a  small  beginning  the  promotion 
charge  is  negligible.  Where  the  enterprise 
is  born  full  size  the  promoter  should  be 
allowed  a  reasonable  percentage.  The  cost 
of  promotion  is  a  real  cost.  It  is  impossible 
to  establish  any  large  enterprise  without 
promotion.  It  is  true  that  it  is  sometimes 
possible  to  pay  the  promoter  wholly  in  hope, 
yet  in  the  long  run  promoters  must  be  paid 
at  least  something  in  cash,  or  else  public 
enterprises  will  lag  and  useful  projects  will 
fail  of  development.  The  value  and  neces- 
sity of  promotion  is  very  frequently  dis- 
puted and  probably  the  statement  that  the 
cost  of  promotion  is  a  legitimate  cost  will 
provoke  some  criticism.  The  fact  is  how- 
ever, that  the  stimulation  of  the  promoter 
is  necessary  and  in  fact  indispensible,  to 
the  organization  of  even  the  most  useful 
projects.  Item  (c)  may  be  taken  care  of 
either  under  the  head  of  "What  is  Invest- 
ment" or  under  the  head  we  are  now  consid- 
ering. In  either  case  the  final  decision, 
expressed  in  dollars  of  capitalization,  or 
expressed  in  present  rate  of  return  to  be  al- 
lowed, is  and  must  be  for  some  time  to 
come,  a  matter  for  the  judgment  of  a  com- 
mission. Some  day,  it  may  be  a  long  way 
in  the  future,  or  perhaps  not  far  ahead,  there 
may  be  an  agreement  upon  exact  rules  for 


the  determination  of  items  (b)  and  (c).  For 
the  present  they  must  be  fixed  upon  judg- 
ment. 

What   Is   Investment 

Investment  may  be  in  money,  or  in  services. 
The  latter  is  as  real  as  the  former.  The 
fact  that  services  have  frequently  been 
grossly  over-valued  has  led  to  a  feeling  that 
the  investment  of  services  should  not  be 
permitted.  This  seems  wrong.  The  services 
of  the  promoter,  for  instance,  may  usually 
best  be  paid  in  stock.  This  amounts  to  say- 
ing that  the  services  of  the  promoter  may  be 
capitalized.  The  danger  is  of  course  that 
stock  being  sometimes  simply  a  matter  of 
the  printing  press,  an  excessive  payment  is 
made  for  promotion,  and  the  public  is  there- 
after charged  with  the  necessity  of  paying 
dividends  upon  a  large  amount  of  water. 
Promotion  stock  in  fact  is  not  water  unless 
it  be  issued  to  a  greater  amount  than  the 
actual  services  of  the  promoter  justify. 

In  some  cases  the  cost  of  promotion  is 
paid  by  the  consciousness  of  the  promoter 
that  he  has  performed  a  public  service  for 
the  benefit  of  the  community.  This  is  not 
so  rare  as  may  be  imagined.  A  conspicuous 
example  is  that  of  the  Los  Angeles  aqueduct, 
now  nearing  completion.  In  connection 
with  this  enterprise  a  number  oT  public- 
spirited  gentlemen  presented  to  the  city  the 
product  of  their  imagination  in  conceiving 
the  enterprise  and  of  their  labors  in  pro- 
moting it,  which  latter  in  this  instance  con- 
sisted of  conducting  a  campaign  that  con- 
vinced the  voting  public  that  taxpayers' 
money  should  go  into  the  proposition.  By 
the  ordinary  standard  of  private  enterprise 
the  initiation  and  financing  of  such  an  enter- 
prise would  be  considered  well  worth  a  very 
large  sum  of  money  provided  the  enterprise 
proved  on  completion  to  be  financially  suc- 
cessful. In  this  case,  and  in  not  a  few  sim- 
ilar cases,  the  promoters  are  in  fact  content 
with  having  accomplished  the  work,  and  in 
such  public  approbation  as  they  may  receive. 
The  city  in  this  case,  or  the  private  enter- 
prise in  some  other  cases,  is  the  gainer. 

In  appraising  a  public  utility  just  put  to- 
gether and  ready  to  operate,  the  writer 
would  include  in  the  appraisal,  besides  fig- 
ures representing  the  cost  in  place  of  each 
physical  item,  (cost  of  engineering,  cost  of 
insurance,  etc.),  also  the  exact  cost  of  put- 
ting together  the  corporation,  (cost  of  legal 
work,  etc.),  and  besides  these  would  include 
payment  for  the  energy  and  initiative  used 
on  the  scheme  as  a  whole,  under  the  head  of 
"Cost  of  Promotion."  All  the  items  on  the 
schedule  added  together  would  then  be  the 
true  "Investment"  when  the  entire  plant 
stands  ready  to  begin  operation. 

Investment  is  usually  of  two  general 
classes,  represented  by  bonds  and  by  stock. 
It  is  the  return  made  to  stockholders  that 


is  nuiinlj'  effected  by  rate  regulation.  It 
is  usual  in  cost  discussions  to  consider  the 
entire  investment  as  if  it  were  furnished  by 
stockholders,  which  as  a  rule  it  is  not.  The 
return  to  stockholders  made  up  as  hereto- 
fore described  as  being  savings  bank  inter- 
est, i)lus  compensation  for  risk,  plus  induce- 
ment to  engage  in  business,  should  only  be 
paid  on  that  part  of  the  investment  that 
carries  risk  with  it,  or  in  other  words, 
should  only  be  allowed  on  that  part  of  the 
investment  made  by  the  stockholders. 

It  frequently  ha])pens  that  75  per  cent  or 
more  of  the  money  required  for  a  project 
is  furnished  by  bond  holders.  For  illustra- 
tion let  us  assume  that  in  order  to  sell  its 
bonds  an  enterprise  must  i)ay  a  return  of 
5%  per  cent  on  money  received  from  the 
sale  of  bonds.  This  allows  for  some  dis- 
count and  commission  on  the  usual  5  per 
cent  bonds.  If  the  proper  return  to  stock- 
holders on  their  part  of  the  investment 
(sum  of  items  (a),  (b)  and  (c),)  be  set 
at  10  per  cent,  the  average  necessary  return 
on  the  total  investment,  75  per  cent  of  which 
is  rei)resented  by  bond  money  costing  5^^ 
per  cent,  and  25  per  cent  of  which  is  money 
from  stock  which  is  to  be  allowed  10  per 
cent,  becomes  6.25  per  cent.  In  making  such 
a  division  in  any  particular  case  the  exact 
financing  of  the  utility  under  consideration 
should  not  be  used,  as  it  is  obviously  un- 
just to  penalize  a  company  for  having  a  high 
credit,  and  for  being  able  to  sell  bonds  bear- 
in:^  a  low  rate  of  interest  to  the  extent  of 
perhaps  80  or  90  per  cent  of  the  total  cost 
of  say  a  particular  extension.  It  is  obvi- 
ously equally  unfair  to  reward  a  company 
for  having  such  poor  credit  that  it  may 
perhaps  only  be  able  to  raise  a  quarter  of 
its  needed  money  from  bonds  and  may  be 
obliged  to  get  from  its  stockholders  the 
other  three-quarters  of  the  money  needed. 
A  commission  should  consider  the  general 
conditions  under  which  similar  public  utility 
companies  of  ordinarily  good  standing  can 
issue  and  sell  bonds.  The  commission  may 
then  adopt  an  average  credit  standard  and 
may  reasonably  permit  a  company  that  ex- 
ceeds this  standard  to  profit  by  so  doing.  It 
must  of  course  be  considered  that  an  enter- 
prise just  being  established  and  presumably 
not  being  able  to  raise  a  very  large  percent- 
age of  its  money  from  bond  issues,  must 
offer  correspondingly  good  inducements  to 
stockholders,  as  their  risk  and  the  difficulty 
of  getting  their  money  increased. 
Franchise  Value 

In  most  rate-fixing  investigations  the 
franchise  itself  is  not  permitted  to  be  re- 
garded as  an  investment  on  which  earnings 
are  made.  This  is  not  necessarily  the 
case,  however,  as  it  frequently  costs  money 
to  get  a  franchise,  and  the  terms  of  the 
franchise  frequently  involve  an  annual  ex- 
pense to  the   company.     For  example  it  is 


not  uncommon  for  an  electric  lighting  com- 
l)any  as  a  condition  of  its  franchise  to  en- 
gage to  supi)ly  electricity  to  various  public 
buildings  free  of  charge,  or  the  company 
may  as  a  condition  of  its  franchise  engage 
to  perform  street  lighting  at  an  especially 
low  rate.  Where  any  of  these  elements  are 
found  the  franchise  represents  either  a  real 
legitimate  initial  expenditure,  or  a  constant 
annual  exiienditure,  and  in  either  case  the 
franchise  may  reasonably  be  regarded  as 
capital  on  which  revenues  must  be  earned. 
In  the  latter  case  the  expenditures  may 
with  equal  justice  be  charged  instead  as 
operating  expenses,  if  for  any  reason  this  is 
preferred  as  a  matter  of  bookkeeping. 
Going  Value 

Assuming  that  we  have  decided  what  con- 
stitutes "investment"  for  an  enterprise  just 
completed  and  ready  to  operate;  what  is 
"investment"  for  "going  concern?"  It  is 
rather  obvious  that  a  completely  equipped 
utility  company  ready  to  operate,  but  having 
no  customers,  has  a  different  value  from  the 
same  utility  a  little  later  when  we  may  as- 
sume that  its  total  product  is  being  sold  at 
a  remunerative  figure.  The  difference  in 
value  between  a  company  without  customers 
and  the  same  company  under  full  operation 
may  reasonably  be  considered  as  repre- 
sented by  the  cost  of  putting  the  company 
into  the  latter  condition;  in  other  words, 
the  cost  of  establishing  the  business.  This 
sum  is  represented  by  early  losses,  or  by 
the  failure  to  earn  proper  profits,  in  the  early 
years  of  operation.  Some  caution  is  neces- 
sary in  arriving  at  a  figure  for  "going  value" 
on  this  basis  and  it  cannot  be  contended 
that  an  unsuccessful  company,  or  a  company 
which  was  not  needed  by  the  community 
when  it  was  put  into  operation,  or  in  other 
words,  where  the  enterprise  could  not  reason- 
ably have  been  expected  to  be  a  financial 
success,  should  be  permitted  to  capitalize 
losses  over  a  long  series  of  years  even 
though  such  losses  in  fact  occurred.  It  is 
assumed  in  the  discussion  up  to  the  present 
point  that  we  are  dealing  with  successful, 
or  reasonably  successful,  utilities,  and  it 
may  be  readily  seen  that  except  in  very  rare 
instances  even  the  most  successful  public 
utility  must  spend  time  and  money  in  creat- 
ing business.  Such  expenditures  are  really 
necessary  costs,  paid  in  money  or  its  equiva- 
lent, and  worth  money  or  its  equivalent, 
and  therefore  are  legitimate  items  going  to 
make    up    "investment." 

Depreciation 

There  is  a  wide  difference  of  opinion  as 
to  proper  methods  of  figuring  depreciation 
and  even  as  to  what  constitutes  deprecia- 
tion. As  these  matters  have  already  been 
considerably  discussed  before  the  various 
technical  bodies,  it  is  not  the  intention  of 
the  present  paper  to  consider  the  matter  of 
depreciation  in  detail.     It  will  therefore  be 


assumed  that  depreciation  is  figured  on  a 
straight  line  basis,  using  the  assumed  usel'ul 
life  of  the  various  items  making  up  the  total 
investment  as  a  basis  for  determining  the 
yearly  charge  against  each  item  to  cover 
depreciation.  It  is  also  assumed  that  depre- 
ciation has  only  one  value  at  a  given  mo- 
ment for  a  given  item.  The  items  of  cost 
of  franchise  if  any,  and  the  costs  of  general 
engineering,  superintendence,  insurance, 
law,  promotion,  going  value,  etc.,  should  be 
subject  to  a  depreciation  charge  as  well  as 
are  the  items  covering  actual  physical  prop- 
erty. This  means,  of  course,  that  such  in- 
tangible costs  as  those  just  enumerated  are 
to  be  written  off,  or  amortized,  in  the  course 
of  time.  Such  costs  are  assumed  to  be  in- 
curred but  once,  and  when  fully  paid  back 
from  a  depreciation  fund  it  may  logically 
be  assumed  that  they  have  been  written  off 
and  removed  from  the  capital  account.  The 
application  of  depreciation  to  intangible 
items  of  this  sort  may  be  justified  logically 
on  theoretical  grounds  but  without  entering 
upon  any  theoretical  discussion  it  will  prob- 
ably be  generally  conceded  that  as  a  prac- 
tical matter  it  is  advisable  to  amortize 
intangible  costs  when,  and  as  soon  as,  pos- 
sible. 

Supervision  of  Depreciation  Fund 

The  rate-making  body  should  have  super- 
vision over  the  accotmting  and  bookkeep- 
ing, in  connection  with  expenditures  from 
any  fund  collected  for  the  purpose  of  balanc- 
ing depreciation.  A  well-managed  corpora- 
tion should  have  the  fullest  power  to  decide 
upon  such  expenditures,  since  the  officers  of 
the  corporation,  if  competent,  will  ordinarily 
be  in  a  better  position  to  form  correct  judg- 
ment of  how  money  should  be  spent  than 
will  any  Supervising  commission.  The  fund, 
in  the  discretion  of  the  corporation's  officers, 
should  be  permitted  to  be  used  for  replacing 
worn-out  machinery  or  buildings,  for  buying 
needed  real  estate  for  the  future,  for  build- 
ing entirely  new  plants,  extending  lines,  or 
in  such  other  legitimate  expenditures  as  the 
officers  in  charge  may  deem  most  beneficial 
to  the  corporation's  present  and  future  bus- 
iness. The  only  restriction  on  such  expen- 
ditures should  be  merely  such  as  will  satisfy 
the  commission  that  wise  judgment  is  being 
exercised. 

The  bookkeeping  in  connection  with  de- 
preciation expenditures  should  be  wholly 
under  the  control  of  the  commission,  that  it 
may  be  made  certain  that  no  part  of  the 
plant,  built  with  depreciation  money,  is 
capitalized,  even  though  the  depreciation 
fund  proves  in  the  course  of  several  years, 
to  have  been  larger  than  was  really  neces- 
sary. This,  of  course,  applies  to  additions 
made  under  regulation  and  not  to  additions 
made  out  of  surplus  earnings  before  the 
advent  of   rate  regulation. 


It  has  been  suggested  that  a  competent 
commission  would  revise  the  depreciation 
allowances  from  year  to  year,  so  as  to  keep 
the  fund  in  the  long  run  at  very  closely 
the  exact  equivalent  of  the  depreciation  that 
has  occurred.  This  is  one  of  those  things 
that  look  easy,  but  in  fact  are  practically 
impossible  to  carry  out.  If  the  depreciation 
allowed  be  too  large  to  begin  with,  it  is 
likely  to  be  too  large  continually,  and  if,  as 
the  writer  believes  best,  the  fund  may  be 
invested  in  new  construction,  it  must  be 
under  the  general  supervision  of  the  rate- 
making  commission,  or  injustice  to  the  pub- 
lic is  likely  to  result. 

Influence  of  History  and  Capitalization 

It  is  argued  by  some  that  capitalization 
should  be  the  controlling  element  upon 
which  to  base  values  for  rate  fixing  pur- 
poses. At  the  least  this  is  said  to  be  correct 
for  a  property  that  is  sufficiently  successful 
to  earn  reasonable  dividends  upon  its  cap- 
italization before  the  advent  of  rate-fixing. 
There  is  a  certain  element  of  reason  and 
justice  in  the  claim  in  its  latter  form,  since 
it  is  undoubtedly  true  that  the  public  bears 
some  responsibility  for  what  has  been  per- 
mitted to  be  done  in  the  past,  and  investors 
who  have  bought  stocks  and  bonds  in  good 
faith,  upon  the  assumption  that  conditions 
were  stable,  are  entitled  to  some  considera- 
tion. It  Is  difficult,  however,  to  find  any 
justification  for  a  fixed  rule  that  would  base 
rates  upon  capitalization,  or  upon  earnings 
prior  to  rate  regulation.  It  seems  to  the 
writer  that  all  rates  should  be  based  primar- 
ily upon  appraisal  of  property,  including  all 
the  tangible  and  intangible  items  heretofore 
mentioned  in  the  final  value  of  the  property. 
It  also  seems  reasonable  that  depreciation 
should  be  subtracted  on  all  items,  and  that 
past  history  should  be  gone  into  to  determine 
to  what  extent  if  any  the  cost  of  intangible 
items,  or  at  least  such  of  them  as  would 
not  be  duplicated  for  a  newly  organized 
competing  corporation,  may  have  been  cov- 
ered by  excess  earnings,  and  may  therefore 
be  considered  as  written  off.  Certain  phys- 
ical items  such  as  real  estate,  will  frequently 
be  appraised  at  more  than  original  cost,  and 
if  an  appreciation  in  one  class  of  property 
is  to  be  allowed,  it  seems  illogical  to  fail 
to  consider  depreciation  on  another  class 
of  property. 

As  we  are  still  considering  what  we  have 
termed  successful  corporations  it  is  not 
necessary  now  to  consider  the  case  where 
past  earnings  have  not  been  sufficient  to 
create  a  proper  depreciation  fund.  This  case 
will  be  briefly  treated  under  another  head. 

If  after  determining  a  proper  income  to 
be  allowed,  it  be  found  for  a  particular  cor- 
poration that  its  stock  and  bonds  have  en- 
joyed a  wide  market,  and  have  been  gener- 
ally distributed  and  would  be  considerably 
depreciated  by  the  revenue  proposed  to  be 


allowed,  then  it  seems  to  the  writer  that  a 
commission  may  reasonably  allow  weight 
to  such  a  state  of  facts.  On  the  one  hand  a 
strict  ruling  will  bring  an  immediate  loss 
upon  the  investor,  and  on  the  other  hand  if 
the  strict  ruling  be  not  followed  a  loss  is 
thrown  upon  the  general  public,  by  collect- 
ing from  them  higher  rates  than  are  neces- 
sary. A  newly  organized  commission  might 
very  reasonably  compromise  by  fixing  a 
term  of  years  at  the  end  of  which  strict 
rulings  will  generally  apply,  and  in  the  mean- 
time gradually  lower  the  rates  during  said 
term.  Such  a  course  does  not  correct  past 
injustice,  but  it  divides  the  losses  resulting 
from  injustice  between  the  stockholder  who 
has  made  an  unfortunate  investment,  and 
the  public  that  permitted  the  unfortunate 
conditions   to   exist. 

Detail  of  Rates 

In  the  writer's  opinion  the  revenue  col- 
lected should  be  based  ultimately  upon  the 
"present  value"  (reproducion  cost,  less 
straight  line  depreciation)  of  all  physical 
and  non-physical  items  of  property  neces- 
sary to  the  service  sold.  The  revenue  should 
be  sufficient  to  cover  operating  expenses; 
depreciation  charges;  and  income  upon 
"present  value." 

It  would  seem  at  first  sight  that  if  an 
agreement  be  once  reached  on  total  revenue 
to  be  collected  the  rate  problem  would  be 
practically  solved.  Such  is  by  no  means  the 
case.  It  is  hardly  too  much  to  say  that 
some  of  the  hardest  problems  still  remain. 
These  problems  do  not  seem  to  be  of  such 
a  nature  that  any  general  solution  may  be 
indicated,  but  they  are  well  worth  discus- 
sion. For  the  purposes  of  the  present  paper 
it  wall  not  be  attempted  to  go  much  further 
than  indicate  a  few  of  the  things  that  must 
be  considered. 

For  illustration,  let  us  consider  the  case 
of  a  company  whose  sole  business  is  the 
manufacture  and  sale  of  electricity.  There 
are  many  public  service  enterprises  that 
handle  a  far  more  complex  business,  but 
this  will  suffice  for  illustration.  It  would 
probably  be  found  that  such  a  company  is 
retailing  electricity  in  small  quantities  for 
domestic  purposes;  that  it  is  supplying 
energy  for  small  motors  over  a  wide  area; 
current  for  small  stores,  scattered  through 
the  residence  districts  of  town;  lighting  for 
apartment  houses  over  quite  a  wide  area; 
lighting  for  hotels  and  department  stores  in 
the  business  districts;  street  lighting,  prob- 
ably of  at  least  two  kinds;  current  for  elec- 
tric elevators;  current  for  manufacturing; 
current  for  pumping  water,  and  probably 
also  current  for  operating  electric  railways. 

Not  only  is  every  one  of  the  classes  of 
service  mentioned  supplied  at  different  cost 
to  the  company,  considering  that  particular 
class  of  load  alone,  but  the  cost  of  supplying 
each   class   is   vitally   affected   by  the   pres- 


ence of  the  other  classes,  i.e.,  by  "diversity 
factor."  Engineers  well  understand  these 
things,  but  the  general  public  does  not,  and 
so  another  and  quite  important  factor  enters 
into  rale-fixing,  namely  the  attitude  of  a 
more  or  less  ill-informed  public.  One  of  the 
most  valuable  features  of  continual  discus- 
sions among  engineers  is  that  gradually  the 
general  public  hears  in  one  way  or  another 
of  what  is  going  on,  and  in  the  course  of 
time  becomes  less  ignorant,  or  even,  at  the 
end,  may  become  well  informed. 

Those  engineers  who  have  happened  to 
be  connected  with  rate-fixing  matters  where 
the  rulings  of  a  commission  have  been  pre- 
ceded and  followed  by  general  public  discus- 
sion, in  the  newspapers  and  on  the  platform, 
will  realize  vividly  the  necessity  for  con- 
sidering the  influence  of  public  opinion,  if 
anything  useful  really  is  to  be  accomplished. 

To  return  to  the  discussion  of  classes  of 
service,  it  will  almost  invariably  be  found 
that  the  public  have  no  proper  conception  of 
the  necessary  difference  in  cost  per  K.W.H. 
between  supplying  a  householder  with  light- 
ing current  say  to  the  amount  of  20  to  30 
KWH.  per  month,  current  being  delivered 
around  100  volts,  and  the  current  measured 
being  used  a  short  time  per  day  while  an 
unmeasured  all  day  loss  goes  on  in  the  cus- 
tomer's individual  transformer;  and  the  cost 
per  K.W.H.  of  supplying  say  500,000  K.W.H. 
per  month,  at  say  10,000  volts,  to  a  railway 
company.  Of  course  it  will  be  generally  ad- 
mitted that  there  must  be  a  reasonable  dif- 
ference between  w^holesale  and  retail  price, 
but  one  continually  finds  a  comparison  being 
made  between  the  prices  of  coal  and  electric- 
ity at  wholesale  and  retail;  and  in  commun- 
ities where  the  water  supply  is  metered,  the 
difference  between  the  wholesale  and  retail 
price  of  a  cubic  foot  of  water  is  always 
brought  into  the  argument.  It  is  maintained 
by  some,  and  to  most  people  very  plaus- 
ibly, that  the  wholesale  and  retail  ratio  in 
the.  case  of  electricity  should  not  be  very 
different  from  the  wholesale  and  retail  ratio 
in  the  case  of  coal  or  water.  It  is  rarely 
pointed  out,  however,  that  a  company  is 
fairly  lucky  if  a  kilowatt  hour  at  100  volts, 
measured  inside  a  customer's  residence,  does 
not  mean  pretty  nearly  two  kilowatt  hours 
measured  back  on  the  high  tension  line. 

There  have  been  an  almost  endless  num- 
ber of  schemes  of  rates  based  upon  the  no- 
tion of  taking  proper  account  of  the  custo- 
mer's load  factor,  and  of  bringing  the  charge 
more  closely  into  line  with  the  actual  cost 
of  the  particular  service  charged  for.  It  is 
obvious  enough  to  engineers  that  rates  ought 
to  take  account  not  only  of  load  factor,  but 
of  time  of  day  when  the  customer's  demand 
is  greatest.  Here  again  the  attitude  of  the 
public  makes  it  difficult  to  use  any  system 
that  may  look  a  little  complex.  The  com- 
pany,   or    the    commission,    must    therefore 


consider  not  only  what  is  tlieoretically  beat, 
and  financially  expedient,  but  also  what  the 
public  will  stand  for. 

The  present  author  inclines  very  much 
toward  putting  residences  using  current 
mainly  for  lighting,  into  a  single  class.  Let 
us  say  that  the  shape  of  the  daily  load  curve 
is  about  the  same  for  all  such  customers. 
Let  us  then  determine  as  closely  as  possible 
the  average  actual  cost  to  the  company  of 
making  and  maintaining  a  connection  to  a 
residence,  including  interest  and  deprecia- 
tion on  that  equipment  used  solely  by  one 
customer  and  not  available  for  any  other 
customer.  Then  let  us  include  the  cost  of 
bookkeeping,  meter  reading,  etc.,  and  pos- 
sibly including  the  cost  of  magnetizing  cur- 
rent. Then  let  each  customer's  bill  have 
printed  on  it  this  sum  as  a  "connection 
charge,"  irrespective  of  whether  any  current 
be  consumed  inside  the  house  or  not.  The 
usual  "minimum  charge"  may  be  eliminated, 
the  cost  per  K.W.H.  lowered  a  little,  and  the 
customer  may  buy,  and  pay  for,  as  little  as 
a  single  K.W.H.  or  as  much  as  he  likes. 
With  this  system  it  really  makes  but  little 
difference  in  the  cost  to  the  company  per 
K.W.H.,  whether  the  customer  uses  10  or 
100  K.W.H.  per  month.  It  is  fair  to  say  that 
the  idea  of  a  connection  charge  does  not  al- 
ways appeal  to  the  public,  but  if  it  is  best 
probably  the  public  can  be  educated  to  accept 
it.  The  use  on  the  other  hand  of  schedules 
based  on  "connected  load,"  or  on  "active 
rooms,"  are  of  great  advantage  only  in  case 
the  shape  of  the  load  curve  can  be  changed 
by  their  use  or  in  case  the  use  of  current  for 
other  than  lighting  purposes  can  be  consid- 
erably increased.  It  would  be  of  in- 
terest to  know  just  what  effect  the 
use  of  these  two  systems,  where  they  are 
in  use,  has  had  on  the  shape  of  the 
load  curve  of  the  average  house- 
holder. If  any  engineers  present  have  exact 
data  bearing  on  this  feature,  it  is  to  be  hoped 
that  they  may  give  the  rest  of  us  the  benefit 
of  it.  The  subject  is  of  the  greatest  im- 
portance, and  a  few  reliable  figures  are 
worth  a  good  deal  of  theorizing.  Of  course 
there  must  be  a  reduced  price  for  large  con- 
sumption, and  to  take  care  of  this  reduction 
the  "block  system"  now  in  use  in  several 
places  seems  at  least  one  of  the  best  meth- 
ods. With  the  block  system  each  customer 
of  a  given  class  pays  a  given  rate  for  the 
first  block,  a  less  rate  for  the  second  block, 
a  still  less  rate  for  the  third  block,  and  so 
on.  The  method  is  quickly  understood  by 
the  public  and  is  well  liked  where  used. 

For  a  householder  whose  use  of  electricity 
is  not  mainly  for  lighting,  it  now  seems  to 
iDe  the  genei-al  practice  to  install  a  second 
meter,  and  charge  a  different  rate.  Perhaps 
that  is  the  most  satisfactory  thing  to  do  at 
present.    It  seems  quite  possible  that  in  the 


future  such  customers  may  be  given  a  com- 
bination of  a  maximum  demand  meter  with 
a  two-rate  clock-controlled  meter.  We  must 
perhaps  wait  for  the  inventor  to  make  this 
sort  of  thing  practicable.  It  is  rather  ob- 
vious that  if  a  correct  and  simple  system 
of  charging  could  be  introduced  that  would 
lead  customers  generally  to  use  current  for 
refrigeration,  electric  cooking,  etc.,  and 
would  also  insure  that  current  were  not  used 
for  such  purposes  during  the  peak  load 
hours,  the  result  would  be  greatly  to  the 
advantage  of  all.  The  weak  point  of  all  sys- 
tems that  simply  encourage  consumption 
is  that  the  increased  consumption  in  some 
part,  and  perhaps  in  large  part,  may  be  at 
the  extreme  peak  for  the  plant. 

When  we  leave  the  field  of  residence  sup- 
ply, and  consider  the  proper  charge  for  the 
almost  innumerable  other  uses  of  electricity, 
we  find  that  it  is  rather  customary  to  divide 
industiies  into  classes,  and  to  make  one  rate 
say  for  laundries,  another  rate  for  brick 
yards,  another  rate  for  planing  mills,  etc. 
The  rates  for  different  industries  seem  most- 
ly to  have  been  made  in  the  past  on  the 
basis  of  what  the  traffic  will  bear.  Thus 
for  a  planing  mill,  where  steam  is  useful 
for  treatment  of  material,  and  where  there 
is  enough  refuse  wood  to  be  disposed  of  so 
that  fuel  may  cost  little  or  nothing,  the 
rate  is  likely  to  be  very  low.  The  rate  for 
an  apartment  house  is  sometimes  consider- 
ably lowered  if  the  owner  has  an  isolated 
plant  ready  for  use.  Of  course  discrimina- 
tion between  different  consumers  of  a  single 
class,  such  as  apartment  houses,  is  now 
largely  done  away  with  by  regulation.  It 
is  still  a  very  serious  question  just  what 
classes  of  business  should  have  separate 
rates,  and  what  those  rates  should  be.  The 
author  is  inclined  to  believe  that  it  is  not 
so  very  uncommon  for  electric  companies  to 
take  business  along  some  particular  line  at 
a  rate  that,  if  all  factors  could  be  correctly 
figured  in,  would  be  shown  to  produce  a  net 
loss.  There  are  frequently  cases  where  an 
individual  consumer  really  can  make  his 
own  electricity  for  a  less  cost  than  the  com- 
pany serving  his  district  can  afford  to  sell 
it  to  him.  There  are  very  many  more  cases 
where  the  consumer  thinks  he  can  make  his 
own  electricity  much  cheaper  than  he  really 
can  make  it.  When  the  solicitor  of  the  com- 
pany, who  is  out  to  make  a  recoi-d,  finishes 
his  negotiations  with  such  a  man,  they  may 
have  arrived  at  a  rate  at  which  the  company 
might  better  not  take  the  business.  In  such 
a  case  if  a  rate-fixing  commission  takes 
charge  and,  by  laying  down  general  rules, 
in  effect  raises  the  rate  to  such  favored  con- 
sumers, the  result  is  likely  to  be  a  loss  of 
business,  and  a  feeling  on  the  part  of  the 
company  that  it  has  been  injured  by  "theo- 
retical" rate-fixing.  As  a  matter  of  fact  the 
company  may  instead  have  been  benefited. 


It  seems  to  the  writer  that  the  effort  in 
apportionins  charges  among  various  classes 
of  consumers  should  be  to  make  each  class 
pay  as  nearly  as  possilile  the  same  rate  of 
return  to  the  company  on  such  part  of  the 
comitany's  plant  and  working  staff  as  serves 
the  particular  class  considered.  Proper 
weight,  however,  must  be  given  to  the  value 
of  the  service  to  the  consumer,  and  to  the 
price  that  the  consumer  can  afford  to  pay. 
Certain  classes  of  users  may  be  able  to  pay 
more  than  other  classes  for  a  K.W.H.  con- 
sumption that  may  cost  the  company  the 
same  in  either  case.  Such  differences  in 
value  of  service  should  be  considered,  as 
well  as  differences  in  cost  to  supply  service. 
The  writer  also  believes  that  generally 
speaking,  too  much  attention  is  given  to 
total  consumption  in  kilowatt  hours,  and  too 
little  attention  is  given  to  load  factor,  and 
especially  to  the  shape  of  the  load  curve,  and 
that  far  too  little  attention  is  given  to 
classes  of  load  that  may  exist,  or  may  be 
developed,  and  may  be  kept  almos.t  wholly 
off  peak.  It  should  be  noted  that  a  customer 
with  an  irregular  load  curve,  but  who  is 
wholly  off  peak,  will  probably  be  more  de- 
sirable, at  least  on  an  extensive  system,  than 
a  customer  with  100  per  cent  load  factor. 

The  writer  would  favor  the  block  system 
of  charging  in  nearly  all  cases,  and,  where 
the  size  of  the  bill  would  justify  it,  would 
like  to  see  a  maximum-demand  meter  used. 
In  that  case  a  possible  arrangement  of 
blocks  and  of  bills  might  be  something  as 
follows:  (the  figures  are  used  for  illustration 
only) : 


Form  of  Bill 


Consumption  for 
month:   K.W.H. 

7320 

K.W.   hours 


Month  of. 


Days  I    Max.     |  Prod- 
I  I  demand!     uct 

30     I       m-^^l    4J4^z»»c? 


2880  K.W.H.   @        5c $144.00 

2880  K.W.H.   @   21/20 72.00 

1560  K.W.H.   @       2c 31.20 


7320  K.W.H.  for  total  sum  of $247.00 

The  preceding  bill  is  for  a  customer  hav- 
ing a  monthly  total  load  factor  of  a  little 
under  10  per  cent.  For  the  same  total  con- 
sumption but  a  better  load  factor  we  may 
assume  additional  illustrative  rates  and  con- 
struct a  bill  as  follows: 

Form    of    Bill 

Consumption  for    I         Month  of     ... 

month:   K.W.H.     | 

I  Days  I    Max.     ]  Prod- 
7320  I  I  demand  I     uct 

K.W.   hours        I     30     |      ^J»-|     »8e«//y^ 


1140  K.W.H. 
1140  K.W.H. 
1140  K.W.H. 
1140  K.W.H. 
1140  K.W.H. 


5c $  57.00 

21/20 28.50 

2c 22.80 

l%c 19.95 

114  c 17.10 


1140   K.W.H.   @    114c 14.25 

480   K.W.H.   @        Ic 4.80 

7320  K.W.H.  for  total  sum  of $1(;4.40 

The  iirocedinj;  tornis,  of  course,  are  simply 
equivalent  to  combining  the  block  system 
with  the  method  already  used  rather  exten- 
sively of  charging  a  rate  depending  upon 
the  "hours  use  of  maximum  demand." 

To  a  limited  extent  it  is  possible  to  take 
care  of  differences  in  the  time  of  day  of 
maximum  demand,  by  varying  the  rate  for 
various  classes  of  service.  Some  businesses 
require  current  only  during  definitely  fixed 
hours.  There  are  objections  to  such  ^classi- 
fications, and  indeed  to  complications  of  any 
sort  in  the  rate.  It  seems  to  be  generally 
conceded  however  that  it  is  going  to  be 
necessary  to  include  either  maximum  de- 
mand directly  measured,  or  to  introduce 
some  quantity  such  as  installed  capacity,  or 
active  installation;  quantities  which  are  as- 
sumed to  be  approximately  proportional  to 
maximum  demand.  As  maximum  demand 
meters  are  not  excessively  expensive  it 
would  seem  that  their  use  should  be  favored 
where  possible. 

It  should  be  noted  that  it  is  not  really 
maximum-demand  of  any  particular  custo- 
mer that  seriously  affects  the  company.  The 
company  is  only  seriously  affected  by  the 
coincidence  of  time  of  the  maximum  de- 
mands of  a  large  number  of  customers.  If 
a  given  consumer  has  his  maximum-demand 
off  peak,  the  size  of  that  demand  is  not  a 
serious  matter.  Perhaps  we  may  come  to 
a  combination  of  clock  and  maximum  de- 
mand meter,  and  base  the  bill  upon  equiva- 
lent hours'  use  of  that  maximum  demand  or 
average  maximum  demand,  which  occurs 
during  peak  load  of  the  plant,  paying  no 
attention  to  what  the  maximum  demand  may 
be  at  other  times  of  day. 

A  rate-fixing  commission  should  meddle  as 
little  as  possible  with  such  rate  details  as 
have  been  mentioned  under  the  present 
heading,  although  a  commission  should  b^ 
ready  to  advise  upon  such  matters  at  the 
request  of  any  company.  A  commission's 
advice  ought  to  be  very  valuable,  for  the 
commiFsion  should  be  in  a  position  to  know 
what  is  being  done  all  over  the  country, 
while  the  officers  of  a  single  corporation 
may  be  so  occupied  with  administrative  de- 
tail as  to  have  little  time  for  investigations. 
While  a  commission  therefore  should  be 
prepared  to  give  voluminous  and  detailed 
advice  upon  request,  it  does  not  seem  proper 
that  a  commission  should  interfere  in  detail 
matters  between  a  company  and  its  custom- 
ers except  where  such  interference  is  really 
necessary  for  the  protection  of  the  public. 
Unsuccssful  Utilities 
The  problem  of  the  unsuccessful  utility, 
or  of  the  utility  that  has  been  unsuccessful 


10 


in  its  early  years  but  afterwards  becomes 
self-supporting  or  better,  is  very  puzzling. 
There  are  certain  general  features,  however, 
that  seem  usually  to  be  overlooked.  In  the 
first  i)lace  it  will  be  generally  recognized 
that  as  an  abstract  proposition  it  is  no  part 
of  the  functions  of  government  to  prevent 
its  individual  citizens  from  losing  money 
(except  by  preventing  fraud  and  through 
the  general  dissemination  of  information 
and  advice,  etc.  The  citizen  who  invests  un- 
wisely in  a  public  utility  is  no  moi-e  entitled 
to  ask  the  government  to  collect  his  loss 
from  the  community,  than  is  the  citizen  who 
invests  unwisely  in  a  grocery  store.  To  go 
a  little  farther,  if  investors  misjudge  a  sit- 
uation and  create  an  enterprise  that  would 
be  profitable  ten  years  later,  such  investors 
are  not  entitled  to  collect  from  the  future 
community  tbe  early  losses  that  came  from 
their  own  poor  judgment.  This  does  not  at 
all  mean  that  a  company  is  not  to  be  allowed 
a  reasonable  time  to  establish  itself,  or  that 
the  reasonably  determined  cost  of  estab- 
lishing a  business  is  not  to  be  capitalized, 
and  paid  for  by  the  public.  Such  costs 
should  be  so  capitalized  and  paid  for.  There 
should  be  a  clear  distinction  made  between 
the  cost  of  establishing  a  successful  busi- 
ness, and  the  losses  following  an  ill-con- 
ceived or  premature  enterprise.  This  is  an 
extremely  important  matter,  and  should  have 
much  more  attention  than  thas  generally 
been  given  to  it.  A  commission  must  be  lib- 
eral in  allowances  for  building  up  a  business, 
or  projects  will  not  be  undertaken.  At  the 
same  time  a  commission  must  guard  care- 
fully against  making  the  public  pay  for  such 
misjudgment  as  in  any  but  a  public  service 
enterprise  would  simply  mean  personal  loss 
to  the  man  who  has  misjudged. 

In  every  rate  discussion  it  is  pointed  out 
that  an  investor  in  public  service  securities 
must  have  an  increased  return  because  of 
the  risk  that  he  runs  of  losing  his  money. 
This  is  perfectly  correct.  ,  The  same  gentle- 
men who  bring  out  this  idea  of  excess  com- 
pensation for  risk,  will  not  infrequently  in 
effect  take  the  position  that  rate-making  bod- 
ies must  see  that  no  investor  in  any  public 
utility  is  permitted  by  any  chance  to  lose 
money.  The  two  propositions  are  incompat- 
ible. An  investor  should  not  be  compen- 
sated for  risk  unless  there  is  risk.     If  the 


government  makes  the  rule  that  such  in- 
vestors must  never  lose,  then  there  is  no 
risk  in  the  investment,  and  no  occasion  for 
excess  compensation.  The  fact  is  that  we 
must  recognize  frankly  that  there  is  a  risk 
to  any  business  and  that  risk  is  the  risk  pf 
losing  money.  This  means  that  some  of  the 
people  who  engage  in  that  particular  kind 
of  business  are  going  to  actually  lose  money. 
Also  it  means  that  the  excess  compensation 
to  those  who  succeed  must  seem  to  the 
investor  to  bear  a  reasonable  relation  io 
the  chances  of  failure,  i.e.,  to  the  proportion 
of  total  money  in  similar  enterprises  that 
in  fact  is  lost. 

Now  for  an  enterprise  that  is  in  advance 
of  the  development  of  the  community,  and 
therefore  must  necessarily  be  losing  money, 
and  where  rates  based  on  proper  return  to 
capital,  provision  for  depreciation,  etc.,  are 
uncollectable,  or  are  more  than  the  commun- 
ity will  pay  before  going  without  the  service, 
the  reasonable  rate  seems  to  be  "what  the 
traffic  will  bear."  That  is  to  say,  the  rate 
must  be  the  one  that  will  bring  in  the  most 
possible  revenue.  The  corporation  in  such 
case  should  be  allowed  to  exercise  its  own 
judgment  in  fixing  the  rates,  the  commission 
only  acting  as  an  advisor. 

When  the  community  catches  up  to  the 
utility.  It  seems  to  the  writer  perfectly  just 
that  the  commission  should  then  value  the 
tangible  and  intangible  values  (as  depreci- 
ated or  appreciated),  including  such  a  "go- 
ing value"  as  would  apply  to  such  a  business 
if  built  up  in  a  community  that  might  sup- 
port it.  It  seems  perfectly  just  that  reven- 
ues and  rates  be  then  based  on  the  appraised 
value.  As  to  the  excess  losses  of  early 
years,  or  the  losses  due  to  depreciation  not 
having  been  met  in  earlier  times,  those 
losses  should  not  in  the  case  outlined,  be 
forced  on  the  public.  It  is  not  recommended 
that  there  should  be  any  abrupt  change  of 
rates  at  any  particular  period  of  growth,  but 
that  as  the  community  becomes  able  to  sup- 
port the  utility  such  a  gradual  change  in 
rates  should  occur  as  will  eventually  bring 
the  public  and  the  utility  into  the  same 
financial  relationship  as  they  would  have 
enjoyed  had  the  utility  been  constructed  at 
a  time  when  the  public  was  ready  for  it,  and 
had  it  therefore  been  successful  from  the 
start. 


11 


251351 


J 


m 


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